Fastener Tech '19 - 190605 - Mid-West Fastener Association · -5.0-4.0-3.0-2.0-1.0 0.0 1.0 2.0 1990...

Economic Outlook

William Strauss

Senior Economist

and Economic Advisor

Federal Reserve Bank of Chicago

Fastener Tech ‘19

Rosemont, IL

June 5, 2019

GDP expanded by 3.2% over the past year

-10

-8

-6

-4

-2

0

2

4

6

8

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Real gross domestic product

percent

Quarterly change (saar)

Percent change from a year earlier

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Monthly

Chicago Fed National Activity Index

Three month average

The Chicago Fed National Activity Index

3-month average in April 2019 was well below trend

The stock market has recovered nearly all of the losses

experienced in the final quarter of last year

50

100

150

200

250

300

350

400

450

500

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Real S&P 500 stock index

Index: 1990 = 100

The Federal Open Market Committee (FOMC) expects

GDP to grow just above trend in 2019;

and around trend in 2020 and 2021

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Real gross domestic product

percent change from a year earlier

FOMC

FOMC Central Tendency (March 2019)

2019 1.9 – 2.2

2020 1.8 – 2.0

2021 1.7 – 2.0

Longer run 1.8 – 2.0

The probability of a recession over the next two quarters

has moved higher, but remains low

0

10

20

30

40

50

60

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Probablility of a recession - two quarters ahead

(Survey of Professional Forecasters)percent

The Index of Leading Economic Indicators

has continued to move higher through April

0

20

40

60

80

100

120

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Composite Index of 10 Leading Indicators

Index (2016=100)

Employment increased by over 2.6 million jobs

over the past 12 months

-8

-6

-4

-2

0

2

4

6

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Total employment

percent

Monthly change (saar)


3

4

5

6

7

8

9

10

11

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Unemployment rate

percent

The unemployment rate fell to a very low 3.6% in April,

the lowest reading since 1969

3

4

5

6

7

8

9

10

11

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Unemployment rate

percent

FOMC

The FOMC forecasts that the unemployment rate

will be below the natural rate through 2021


2019 3.6 – 3.8

2020 3.6 – 3.9

2021 3.7 – 4.1


Wages and benefit costs continue to increase

at a moderate rate,

although it may finally be picking up some its pace

0

1

2

3

4

5

6

7

8

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Employment cost index

percent change from year ago

benefit costs

wages and salaries

There is a very strong correlation between 9-month lead

NFIB: planning to raise compensation and

Employment Cost Index: wages and salaries

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0

5

10

15

20

25

1986 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Employment cost index - wages and salaries and

NFIB: Companies planning to raise wages and salaries

% of frims

ECI: wages and salaries

(private industry workers) - right scale

NFIB: Companies planning to raise worker compensation

(9 month lead) - left scale

% y/y

Correlation = 0.84

Slow productivity growth over the past nine years

helps explain why relatively strong employment growth

has not translated into higher wages

-1

0

1

2

3

4

5

1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Productivity

percent change (20-qtr rate)

A large part of the weakness in productivity growth

has been the weak pace of investment,

although it has been increasing at a strong pace

beginning in 2017

-30

-20

-10

0

10

20

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Real private nonresidential fixed investment

percent



This may help explain the productivity

growth improvement over the past couple of years

-3

-2

-1

0

1

2

3

4

5

6

7

8

1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Productivity


-15

-10

-5

0

5

10

15

20

1950 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Unit labor cost

percent



Improving productivity growth is helping to keep

unit labor cost growth down even with compensation rising

-100

-50

0

50

100

150

200

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Nonfinancial corporate profits

percent



Corporate profits continue to improve

-2

-1

0

1

2

3

4

5

6

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Personal consumption expenditure - chain price index


Inflation is below the Fed target of 2%

0

20

40

60

80

100

120

140

160

1970 '75 '80 '85 '90 '95 '00 '05 '10 '15

Real West Texas Intermediate oil price

dol lars per barrel, 2018 dollars

In large part inflation has been following

the pattern of energy prices

3

4

5

6

7

8

9

10

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Energy goods and services expenditures as a share of

total consumptionpercent

Expenditures on energy remain

well below the historical average

3

4

5

6

7

8

9

10

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Energy goods and services expenditures as a share of

total consumptionpercent

60s

70s

80s

90s 00s

1960-2018

10s

0

1

2

3

4

5

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Personal consumption expenditure - less food and energy -

chain price indexpercent change from a year earlier

Removing the volatile food and energy

components from the PCE,

“core” inflation is below 2%

The FOMC anticipates that PCE inflation will be around

its two percent target through 2021

-2

-1

0

1

2

3

4

5

6

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Personal consumption expenditure - chain price index


FOMC


2019 1.8 – 1.9

2020 2.0 – 2.1

2021 2.0 – 2.1

Longer run 2.0

0

1

2

3

4

5

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Personal consumption expenditure - less food and energy -

chain price indexpercent change from a year earlier

FOMC

The FOMC anticipates that “core” PCE inflation

will also remain around two percent through 2021


2019 1.9 – 2.0

2020 2.0 – 2.1

2021 2.0 – 2.1

Inflation Exchange Rate

Real GDP % change Against Interest Rates

% change Annual US Dollar 3-Month

Annual Consumer Prices End of Year End of Year

2018 2019 2020 2018 2019 2020 2019 2020 2019 2020

United States 2.9 2.6 1.9 2.4 1.9 2.2 - - 2.42 2.39

Canada 1.8 1.6 1.7 2.3 1.9 2.0 1.31 1.30 1.92 2.11

Mexico 2.0 1.6 1.8 4.9 3.9 3.7 19.90 20.15 8.09 7.64

Japan 0.8 0.7 0.5 1.0 0.9 1.2 109.1 107.9 -0.03 -0.01

South Korea 2.7 2.3 2.4 1.5 1.1 1.7 1,125 1,104 1.94 2.11

United Kingdom 1.4 1.2 1.4 2.5 2.0 2.0 1.34 1.39 0.93 1.20

Germany 1.5 0.9 1.4 1.9 1.6 1.7 1.16 1.21 -0.24 -0.07

France 1.6 1.3 1.4 2.1 1.3 1.5 1.16 1.21 -0.24 -0.07

Euro Zone 1.8 1.2 1.4 1.8 1.4 1.5 1.16 1.21 -0.24 -0.07

Brazil 1.1 1.9 2.5 3.7 3.9 4.0 3.84 3.79 6.26 6.79

Russia 2.3 1.5 1.7 2.9 4.9 4.0 66.01 64.71 7.40 7.05

China 6.6 6.3 6.1 2.1 2.3 2.4 6.73 6.69 2.91 2.99

India 7.4 7.1 7.2 3.9 4.2 4.7 70.19 69.92 6.63 6.64

Blue Chip Economic Indicators Forecast May 10, 2019

Blue Chip International Consensus Forecasts

Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19

Globa l 53.0 52.8 52.6 53.2 52.0 52.0 51.5 50.8 50.6 50.6 50.4 49.8

United Sta tes 55.4 55.3 54.7 55.6 55.7 55.3 53.8 54.9 53.0 52.4 52.6 50.5

Canada 57.1 56.9 56.8 54.8 53.9 54.9 53.6 53.0 52.6 50.5 49.7 50.0

Mexico 52.1 52.1 50.7 51.7 50.7 49.7 49.7 50.9 52.6 49.8 50.1 50.1

Eurozone 54.9 55.1 54.6 53.2 52.0 51.8 51.4 50.5 49.3 47.5 47.9 47.7

Germany 55.9 56.9 55.9 53.7 52.2 51.8 51.5 49.7 47.6 44.1 44.4 44.3

France 52.5 53.3 53.5 52.5 51.2 50.8 49.7 51.2 51.5 49.7 50.0 50.6

Ita ly 53.3 51.5 50.1 50.0 49.2 48.6 49.2 47.8 47.7 47.4 49.1 49.7

Spa in 53.4 52.9 53.0 51.4 51.8 52.6 51.1 52.4 49.9 50.9 51.8 50.1

UK 54.4 53.8 53.0 53.6 51.1 53.6 54.2 52.8 52.1 55.1 53.1 49.4

Russia 49.5 48.1 48.9 50.0 51.3 52.6 51.7 50.9 50.1 52.8 51.8 49.8

Japan 53.0 52.3 52.5 52.5 52.9 52.2 52.6 50.3 48.9 49.2 50.2 49.8

China 51.0 50.8 50.6 50.0 50.1 50.2 49.7 48.3 49.9 50.8 50.2 50.2

India 53.1 52.3 51.7 52.2 53.1 54.0 53.2 53.9 54.3 52.6 51.8 52.7

Brazil 49.8 50.5 51.1 50.9 51.1 52.7 52.6 52.7 53.4 52.8 51.5 50.2

Manufacturers’ Purchasing Managers Indexes

More open countries have had better growth

U.S. tariffs used to be much higher

Tariffs: U.S. versus other countries

Tariffs: Recent tariffs have now pushed the U.S. much higher

Tariffs: U.S. trade with Mexico is mainly intra-company trade

Tariffs: Significant amount of U.S. exports consists of

imports from other countries, especially for the auto industry

Tariffs: The auto industry dominates the import story

The Blue Chip forecast projects a continuing

deterioration in the balance of trade

-1200

-1000

-800

-600

-400

-200

0

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Net exports

bi l lions of chained 2012 dollars (saar)

Q1-2019

Blue Chip Forecast

0

500

1,000

1,500

2,000

2,500

1980 '85 '90 '95 '00 '05 '10 '15 '20

Housing starts

thousands

Blue Chip Housing Starts

Forecast (thousands)

Actual Forecast

2018 2019 2020

1,249 1,234 1,261

The Blue Chip Forecast calls for a continuation

of the very gradual recovery in housing

Manufacturing output growth has slowed to zero

-40

-30

-20

-10

0

10

20

30

40

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Industrial production - manufacturing

percent

Monthly change (saar) Percent change from a year earlier

62

64

66

68

70

72

74

76

78

80

82

84

86

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Capacity utilization - manufacturing

percent

Capacity utilization has been falling

Manufacturing employment increased by

204,000 workers over the past 12 months

-25

-20

-15

-10

-5

0

5

10

15

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Manufacturing employment

percent

Monthly change (saar)


Year-to-date light vehicle sales are 16.8 million units in 2019,

1.7% below the comparable period from a year earlier

89

10111213141516171819202122

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Light vehicle sales

mil lions of units (saar)

Year-to-date 2019 light truck sales were 1.6% higher,

while year-to-date 2019 passenger car sales were 8.8% lower

3

4

5

6

7

8

9

10

11

12

13

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Passenger car and light truck sales

mil lions of units (saar)

light trucks

passenger cars

Light truck market share is at a record high

30

35

40

45

50

55

60

65

70

75

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Light truck share of light vehicle market sales

percent

Alternative powered vehicles (including hybrids)

are a very small fraction of total vehicle sales

0

10

20

30

40

50

60

70

80

90

100

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Power-Type

percent of total sales

Alternative

Gasoline and Diesel

Alternative powered vehicles (including hybrids)

market share remains below 5%

0

1

2

3

4

5

6

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Alternative Powered Vehicles

percent of total sales

Blue Chip forecasts vehicle sales to

move lower this year and in 2020

10

11

12

13

14

15

16

17

18

1980 '85 '90 '95 '00 '05 '10 '15 '20

Vehicle sales

mil lions of units

Blue Chip Light-Vehicle

Sales Forecast

Actual Forecast

2018 2019 2020

17.2 16.7 16.4

The industrial sector’s output growth

had been solid during 2018

Manufacturing Industries Activity ChartGrowth (3-month moving average)

compared with the most recent 5-year trend

Current 3 Month Moving Average Growth is:Above Trend and Accerating

Above T rend and DeceleratingBelow Trend and AcceleratingBelow T rend and Decelerating

Contracting but ImprovingContracting and Deteriorating

5-year Trend 2014 2015 2016 2017 2018 2019Manufacturing 0.7%Wood Products 3.0%Nonmetallic Minera l Products 2.1%Primary Metals -1.1%Fabricated Metal Products 0.1%Machinery -1.2%Computer and Electronic Components 2.9%Electrica l Eqpt, Appliances & Components -0.2%Motor Vehicles and Parts 1.8%Aerospace & Misc. T ransport Equip -0.3%Furniture and Related Products 0.9%Miscellaneous Durable Goods 0.8%Food, Beverages, and Tobacco 1.3%Textile and Product Mills -1.1%Apparel and Leather Goods -6.3%Paper -1.5%Printing and Related Support Activities -1.1%Chemicals 1.3%Petroleum and Coal Products 0.5%Plastics and Rubber Products 1.2%

The supply managers’ composite index

has been moving lower

30

35

40

45

50

55

60

65

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Purchasing managers' index - composite

net percent reporting increases

-25

-20

-15

-10

-5

0

5

10

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Total industrial production

percent



Q1-2019

Blue Chip CPI Forecast

Actual Forecast

2018 2019 2020

4.0 1.2 1.5

Industrial production is forecast to rise

at a slower pace this year and in 2020

Credit spreads between Corporate High Yield securities

and Corporate Aaa securities increased

towards the end of last year,

although it has pulled back this year

The yield curve has flattened

-1

0

1

2

3

4

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Yield curve - 10-year Treasury note yield minus

3-month Treasury bill yieldpercent

-1

0

1

2

3

4

2000 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

10-year T-Note to 3-month T-Bill spread

percent

Q1 -2019

percent

Blue Chip Forecast

Blue Chip does not expect the yield curve to invert

0

1

2

3

4

5

6

7

8

9

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Fed Funds rate

percent

The Federal Reserve increased the

Federal Funds rate by 2.25% since December 2015

0

1

2

3

4

5

6

7

8

9

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Target Federal Funds Rate

percent

FOMC

The Federal Funds Rate is expected to be

just below the neutral range in 2019

and at the bottom end of the neutral range in 2020 and 2021


2019 2.4 – 2.6

2020 2.4 – 2.9

2021 2.4 – 2.9


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Assets of the Federal Reserve

Bi l lions of dollars

Term Auction Credit

Securities Held Outright

Central Bank Swaps

Maiden Lane II & III

Commercial Paper Facility

2007 '08 '09

Term Asset-Backed Securities

Loan Facility

AIG Support

Maiden Lane

'10 '11 '12 '13 '14 '15 '16 '17 '18

The Fed’s balance sheet has been falling since October 2017

and will end the balance sheet reduction in September 2019

•The outlook is for the U.S. economy to expand at a pace

just above trend in 2019 and close to trend in 2020 and 2021

Summary

•Employment is expected to rise moderately with the

unemployment rate remaining very low

•Inflation is forecast be at the Fed’s Inflation target through 2021

•Vehicle sales are anticipated to edge lower this year and in 2020

•Manufacturing output is expected to increase at a somewhat

slower pace in 2019 and 2020

•Housing is predicted to improve at a modest pace

www.chicagofed.org

www.federalreserve.gov

Fastener Tech '19 - 190605 - Mid-West Fastener Association · -5.0-4.0-3.0-2.0-1.0 0.0 1.0 2.0 1990...

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